Danger Ahead?

Originally published: 03.01.11 by
Tony Petrucciani

How to use KPIs as a
warning system instead of
just a reporting system.

The pace of modern business
calls for new ways to use
key-performance indicators
(KPIs) beyond traditional
spreadsheet reports issued on a regular
schedule. In fact, such end-of-month or
end-of-quarter reporting is becoming an
increasingly ineffective way to spot red
flags that can precede a problem.

Protecting profits and market share
requires an immediate response to problems
as they arise or — better yet — predictive
insight into a potential problem
and an action plan to prevent it.
Fortunately, new strategies and reporting
tools can enable contractors to
use KPIs to quickly identify the underlying
issues of problems and find solutions
faster.

These new capabilities are
enabled by technology — specifically,
business-information software solutions
designed for service businesses that provide
ad hoc reporting tools, real-time
data tracking, continuous updating of
critical metrics and numbers, a way to
see the interaction of performance drivers,
the ability to “drill-down” through
multiple layers of data, and ways to visually
display data such as in-platform
pivot tables.

Is Now the Time to Change?

At what stage in a company’s growth
should it develop and implement a predictive
KPI program? Is a family-owned
business with one service truck too small
to take advantage of available technology?
Of course not! Productivity and accuracy
are essential to profitability — no
matter the size of the company. Here are
three ways to tell when it’s time

to make
a change to how you are using KPIs:

Once the level of business (or number
of transactions) becomes too
time-consuming and cumbersome
to manage with spreadsheets, it’s
time to automate (invest in businessinformation
management technology).

Errors are occurring, and customer
satisfaction is slipping because service
is not responsive enough. This
indicate’s it is time to implement a
system based on real-time data.

If high-value technicians are spending
more time on tedious manual
paperwork rather than billable activities,
the Return on Investment
in automating with software will be
relatively quick.

Even if a business is small, it will benefit
from initiating a KPI program early
so that a sound infrastructure is in place
and ready to help manage the growth
process. Using KPIs early gives a young
company a baseline for its maturity and
allows it to measure and document success
over time.

Using KPIs effectively for ongoing
problem solving also requires a new
way of thinking for management teams.
Here is some key information on how to
address each of these:

New Thinking for Management

A management team using KPIs for
effective problem identification and
problem solving will:

Ask strategic questions. Making
strategically aligned inquiries is essential
to problem solving but is often overlooked.
Meaningful KPIs answer questions
— most importantly, questions
that lead directly to revenue streams.
“Why is revenue down?” is the obvious
question contractors ask when there
is an unexpected dip in the bottom line.

But this question is too general and is
likely to lead to a costly and ineffective
response instead of leading to the most
simple, appropriate answer.
“Why is parts revenue down 2% from
the previous month and down 4% from
the same month in the previous year, although
the number of service calls over
the past 12 months is up 1%?” is a multipart
question that more accurately reflects
the complexity and intertwined
cause-effect of the many drivers of profitability.

Oversimplification is dangerous.
But asking performance-oriented
questions with specific details can help
to pinpoint what KPIs the team should
be watching.

Focus on what is driving performance.
How does KPI analysis become
preemptive, rather than reactive? The
answer lies in finding the drivers and
trigger points of performance.

Tracking
and monitoring one KPI is far from sufficient,
and adding a few more KPIs to
the process is only a moderate improvement.
Maximum effectiveness comes
from ongoing review and study of existing
KPIs and what’s driving them. This
review and study will reveal new KPIs
and even which KPIs are no longer important
or not a truly effective measure
of performance.

The results of one analysis should
lead to another, leading to another critical
number to track, leading to another
ad hoc report, leading to another KPI to
monitor, etc. Stop thinking about KPIs
as something to be identified once every
couple of years.

An example: Let’s say your company
wants to reduce parts inventory to improve
your daily cash flow. Several factors
influence on-hand inventory levels,
as well as a potential cash-flow shortage.
But, which factors are measurable, predictable,
and able to be influenced?

One
driver might be purchasing. Perhaps
parts and equipment are being purchased
in quantities too large for your
demand, and a new purchasing KPI
needs to be created.
Identifying the appropriate drivers
may involve a degree of trial and error.
The further removed the driver is from
the result, the harder it may be to find or
control. Ad hoc reporting may uncover a
chain of drivers.

Intervene as early as possible.
Correcting the non-compliance early
has the most benefits. Like a toppling
line of dominoes, one issue leads to another,
escalating damage.

The disastrous chain reaction can be prevented if the
first wobbling domino is spotted and
steadied. So, too, if the first KPI alert is
established early enough in the operational
process, there is time to analyze
options, make a careful correction, and
minimize risk.

Evaluate risks associated with early
intervention. Although early intervention
is good, any actions taken need to be
evaluated for both immediate and longterm
ramification. Yes, all purchasing
could be curtailed for a period in order
to bring inventory levels down, but is the
marketing team wrapping up a directmail
campaign to increase service calls?
If so, make sure the company is prepared
for a potential upswing in appointments
from the campaign.

Using The Right Technology

Use (or invest in) flexible reporting
tools. In using KPIs for problem
solving, detailed, multi-dimensional
questions can be answered only with a
flexible — yet detailed — ad hoc reporting
software tool. Flexibility solves the
inherent customization challenges that
arise from each company’s unique perspectives,
terminology, and applications
of data.

How do you know if your company
has flexible reporting capabilities?
When you, as a leader, can prepare a KPI
report without help from your IT team
or without special training, this is maximum
flexibility.

Make predictive analysis your ultimate
goal. “If our inventory continues
to remain at this over-stock level, we will
reach a cash-flow roadblock by the end
of next quarter.” This is a much more
meaningful statement than, “We have to
reduce inventory or we’ll run out of cash!”
There is a key word that changes the entire
perspective: “If.” Yes, opportunity
exists! And, timing! Predictive analysis allows changes to be made while there
is still time to affect the outcome, or at
least, prepare for it. Preemptive actions
are certainly more cost effective. Besides the financial savings, customer satisfaction
may also be preserved, something
that is far harder to recover than lost
revenue. Obtaining a new customer
costs up to seven times as much as retaining
one, some analysts estimate.

Use real-time data. Unlike snapshot-
captured data, which becomes obsolete
the moment it hits a spreadsheet,
real-time data is dynamic, living and —
typically — still retains the ability to be
influenced. Easy-to-use, flexible ad hoc
reporting, therefore, becomes the primary
tool that allows managers to delve
into the depths of research and analysis.
Advanced software can provide pivottables,
filters, and sort capabilities for
KPI data.
Paper spreadsheets should be
reserved for historical data rather than
problem solving.

It’s a lot like spilled
milk. “We lost revenue last month” is a
statement that comes too late, is unactionable,
and breeds energy-wasting
grief.

Conclusion: Keep KPIs on Track
With Growth

A company’s KPIs strategy must evolve if it is to match the changing
needs of a growing company. What
worked in the company’s early growth
stage is far from sufficient for a
multi-branch organization. The modern
service marketplace requires a new generation
of KPI reporting and tracking tools.

Tony Petrucciani is CEO of Single Source Systems, Inc., a software developer located in Indianapolis that specializes in software solutions for service-intensive companies such as HVAC contractors.

Articles by Tony Petrucciani

Danger Ahead?

A company’s KPIs strategy must evolve if it is to match the changing needs of a growing company. What worked in the company’s early growth stage is far from sufficient for a multi-branch organization. The modern service marketplace requires a new generation of KPI reporting and tracking tools.View article.